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Haldane on the evolution of banking

Andrew Haldane of the Bank of England (HT: Diane Coyle) in a recent speech looks at the increased leverage and the socialization of losses in the banking industry:

This century-long evolution in banking occurred for understandable reasons; it was no-one’s ‘fault’. But it has also unearthed a governance fault-line. Ownership and control rights are exercised by shareholders. But for banks, equity is a vanishingly small fraction of their balance sheet. Worse still, equity-holders often have risk-taking incentives out of line with the interests of other bank stakeholders, much less society. This fault-line lies at the heart of the imbalance between privatised returns and socialised risks. Only in banking do control rights and incentive wrongs combine so uncomfortably.